November 5, 2014 / 1:18 PM / in 3 years

UPDATE 2-Tim Hortons profit tops estimates as customers spend more

(Adds analyst’s comment, details, stock price)

By Solarina Ho

TORONTO, Nov 5 (Reuters) - Profit at Canadian coffee and doughnut chain Tim Hortons Inc, which is being bought by Burger King Worldwide Inc, beat market estimates in the third quarter as customers opted for the more expensive items on the company’s menu.

Net income fell about 14 percent, however, mostly due to costs related to U.S. fast-food chain Burger King’s C$12.64 billion ($11.06 billion) takeover deal, Tim Hortons said on Wednesday.

On Tuesday, Burger King reported its strongest quarterly growth in North American same-restaurant sales in two years.

“Both Tim Hortons and Burger King have good franchisee-level sales momentum heading into the merger of their businesses,” Desjardins analyst Keith Howlett said in a client note.

The transaction, announced in August and expected to close next month or early 2015, would create the world’s third-largest fast-food restaurant group.

Tim Hortons shareholders will vote on the deal on Dec. 9. The company’s stock rose 1 percent to C$92.74 on Wednesday.

Tims said sales for the three months ended Sept. 28 at stores open at least 13 months rose by 6.8 percent in the United States versus 3 percent a year earlier. In Canada, they rose by 3.5 percent versus 1.7 percent.

Customers in Canada spent more on breakfast and lunch items such as the new spicy crispy chicken sandwich, but traffic fell for the 10th straight quarter.

The U.S. market also saw an increase in spending, particularly on breakfast. Customer traffic rose a bit.

A newly introduced dark roast, only the second coffee blend in Tims’ 50-year history, was popular on both sides of the border, the Oakville, Ontario-based company said.

As part of its U.S. expansion strategy, Tims said it signed a deal in October to open 10 stores in New Jersey. It now has seven U.S. development agreements for about 145 new restaurants over a 10-year period, the company said.

Merger costs were C$27.3 million, or 21 Canadian cents a share, in the quarter. Excluding those, earnings jumped more than 25 percent to 95 Canadian cents a share, ahead of analysts’ average estimate of 88 Canadian cents, according to Thomson Reuters I/B/E/S.

The company said its share repurchase program also helped lift earnings per share, while analysts noted that royalties and rental income were higher than expected, while wholesale warehouse costs were lower.

Tims, which says it sells nearly eight of every 10 cups of coffee sold in Canada, reported a 10 percent rise in total revenue to C$909.2 million. Analysts, on average, had expected revenue of C$882.2 million.

Net income fell to C$98.1 million, or 74 Canadian cents a share, from C$113.9 million, or 75 Canadian cents a share, a year earlier.

System-wide sales at its 4,590 locations rose 7.5 percent on a constant currency basis.

$1=$1.14 Canadian With additional reporting by Sayantani Ghosh in Bangalore; Editing by Savio D'Souza and Peter Galloway

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